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Institutional Investment in Infrastructure in Emerging Markets and Developing Countries

Public-Private Infrastructure Advisory Facility (PPIAF)

This study discusses the role of institutional investors in financing infrastructure in emerging markets and developing economies (EMDEs). It analyzes the present level of involvement as well as the future investment potential of new financing sources such as public and private pension funds, insurance companies, and sovereign wealth funds. Current investment volumes are still low, but interesting, practical examples can be found in a range of countries and projects. International and domestic investors apply a variety of investment approaches in developing countries, using different equity, debt and fund instruments.

This overview can yield some lessons for policy makers and investors. There are (more or less) favorable pre-conditions for successful private-investor involvement, and different models work in different situations, depending on the development stage and the institutional environment. Four types of “leadership models” are therefore described for international and/or domestic investors seeking to spearhead infrastructure investment in EMDEs.

There are huge infrastructure investment needs worldwide, but particularly so in developing countries. Given current constraints on traditional sources of public and private financing, institutional investors are increasingly being considered as sources of financing for infrastructure project development and maintenance. At the same time, investors have started to look at infrastructure as an interesting investment opportunity for their own reasons—including low interest rates in many developed economies, and the search for non-correlated assets in the wake of the global financial crisis.

Furthermore, many pension funds and insurance companies are looking for longer-term assets, new sources of income, and better diversification in their asset allocations. The match is (in theory at least) a good one: Infrastructure can potentially provide a predictable (and often inflation-linked) cash flow and a low correlation to other asset classes.

However, institutional investors have their own objectives and regulations, and there are barriers on both the supply side (e.g. the lack of investable projects) and the demand side, e.g. a lack of scale and capacity. Such issues are particularly serious in developing countries.

This report provides a framework for the analysis of a wide and complex field. It also reviews the literature and data sources on the subject, explores key concepts, and adds new research and insights. Institutional investment is first placed in the context of the overall demand and supply of infrastructure finance in emerging markets.

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Categories: Private Sector & Public-private Partnerships, Infrastructure Financing, Energy, ICT, Transport, Water

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